Yahoo Finance Vista Group International (NZSE:VGL) Seems To Use Debt Quite Sensibly
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Vista Group International Limited (NZSE:VGL) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Vista Group International
How Much Debt Does Vista Group International Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2018 Vista Group International had NZ$11.9m of debt, an increase on NZ$11.3m, over one year. But it also has NZ$34.4m in cash to offset that, meaning it has NZ$22.4m net cash.
A Look At Vista Group International's Liabilities
We can see from the most recent balance sheet that Vista Group International had liabilities of NZ$43.7m falling due within a year, and liabilities of NZ$18.0m due beyond that. Offsetting these obligations, it had cash of NZ$34.4m as well as receivables valued at NZ$59.4m due within 12 months. So it actually has NZ$32.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Vista Group International could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Vista Group International has more cash than debt is arguably a good indication that it can manage its debt safely.
Also good is that Vista Group International grew its EBIT at 17% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Vista Group International's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Vista Group International may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Vista Group International's free cash flow amounted to 33% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Vista Group International has net cash of NZ$22m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 17% over the last year. So we don't have any problem with Vista Group International's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Vista Group International, you may well want to click here to check an interactive graph of its earnings per share history.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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